NAMIBIA UNIVERSITY OF SCIENCE AND TECHNOLOGY

FACULTY OF MANAGEMENT SCIENCES

DEPARTMENT OF ACCOUNTING, ECONOMICS AND FINANCE

QUALIFICATION: BACHELOR OF ECONOMICS

QUALIFICATION CODE: O7BECO LEVEL: 7

COURSE CODE: MAB611S COURSE NAME: MONEY AND BANKING

SESSION: JUNE 2019 PAPER: THEORY

DURATION: 3 HOURS MARKS: 100

FIRST OPPORTUNITY EXAMINATION QUESTION PAPER

EXAMINER(S) | Ms Kasnath Kavezeri

Mr Immanuel Nashivela

Mr Eden Shipanga

MODERATOR: | Mr Mally Likukela

INSTRUCTIONS 1. Answer ALL the questions.

2. Write clearly and neatly.

3. Number the answers clearly.

PERMISSIBLE MATERIALS

1. Pens/pencils/erasers

2. Calculator

3. Ruler

THIS QUESTION PAPER CONSISTS OF 6 PAGES (Including this front page)

1

QUESTION 1 [25 Marks]

Select the letter that best represents your choice.

1.

a) b) c) d)

a) b) c)

d)

a)

b)

The price paid for the rental of borrowed funds (usually expressed as a percentage

of the rental of $100 per year) is commonly referred to as the

Inflation rate.

Exchange rate.

Interest rate.

Aggregate price level.

Everything else held constant, a decline in interest rates will cause spending on

housing to

Fall.

Remain unchanged.

Either rise, fall, or remain the same.

Rise.

An increase in interest rates might saving because more can be earned in

interest income.

Encourage

Discourage

Disallow

Invalidate

A financial crisis is

Not possible in the modern financial environment.

A major disruption in the financial markets.

A feature of developing economies only.

Typically followed by an economic boom

Banks are important to the study of money and the economy because they

Channel funds from investors to savers.

Have been a source of rapid financial innovation.

Are the only important financial institution in the u.s. economy.

Create inflation.

Financial institutions that accept deposits and make loans are called

Exchanges.

Banks.

Over-the-counter markets.

Finance companies.

The management of money and interest rates is called policy and is

conducted by a nation's bank.

Monetary; superior

Fiscal; superior

c) dq)

8.

a)

b)

c)

d)

a) b) c) dq)

10.

a) b) c) d)

11.

a)

b)

c)

d) 12.

a) b) c) dq)

13.

a)

b)

c)

d) 14,

a)

Fiscal; central

Monetary; central

You can borrow $5,000 to finance a new business venture. This new venture will

generate annual earnings of $251. The maximum interest rate that you would pay on

the borrowed funds and still increase your income is

25%.

12.5%.

10%.

5%.

If the maturity of a debt instrument is less than one year, the debt is called

Short-term.

Intermediate-term.

Long-term.

Prima-term.

Which of the following statements about the characteristics of debt and equity is

FALSE?

They can both be long-term financial instruments.

They can both be short-term financial instruments.

They both involve a claim on the issuer's income.

They both enable a corporation to raise funds.

Equity holders are a corporation's . That means the corporation must pay all

of its debt holders before it pays its equity holders.

Debtors

Brokers

Residual claimants

Underwriters

Which of the following benefits directly from any increase in the corporation's

profitability?

A bond holder

A commercial paper holder

A shareholder

A treasury bill holder

A financial market in which previously issued securities can be resold is called a

market.

Primary

Secondary

Tertiary

Used securities

A liquid asset is

An asset that can easily and quickly be sold to raise cash.

3

fo) 16.

a)

b)

c)

d) 17.

a)

b)

c)

d) 18.

a) b) c) d)

19.

a) b) c) d)

20.

a)

b)

c)

d) 21.

a)

A share of an ocean resort.

Difficult to resell.

Always sold in an over-the-counter market.

Equity instruments are traded in the market.

Money

Bond

Capital

Commodities

Because these securities are more liquid and generally have smaller price fluctuations,

corporations and banks use the securities to earn interest on temporary

surplus funds.

Money market

Capital market

Bond market

Stock market

Collateral is the lender receives if the borrower does not pay back the loan.

A liability

An asset

A present

An offering

Bonds that are sold in a foreign country and are denominated in a currency other than

that of the country in which it is sold are known as

Foreign bonds.

Eurobonds.

Equity bonds.

Country bonds.

The concept of diversification is captured by the statement

Don't look a gift horse in the mouth.

Don't put all your eggs in one basket.

It never rains, but it pours.

Make hay while the sun shines.

The problem created by asymmetric information before the transaction occurs is

called , while the problem created after the transaction occurs is called

Adverse selection; moral hazard

Moral hazard; adverse selection

Costly state verification; free-riding

Free-riding; costly state verification

Adverse selection is a problem associated with equity and debt contracts arising from

The lender's relative lack of information about the borrower's potential returns and

4

risks of his investment activities.

b) The lender's inability to legally require sufficient collateral to cover a 100% loss if the

borrower defaults.

c) The borrower's lack of incentive to seek a loan for highly risky investments.

d) The borrower's lack of good options for obtaining funds.

22. Financial intermediaries are better equipped than individuals to screen out bad credit

risks from good ones, thus reducing losses due to

a) Adverse selection.

b) Moral hazard.

c) Free-riding.

d) Economies of scope.

23. Which of the following is NOT a goal of financial regulation?

a) Ensuring the soundness of the financial system

b) Reducing moral hazard

c) Reducing adverse selection

d) Ensuring that investors never suffer losses

24. is used to make purchases while is the total collection of pieces of

property that serve to store value.

a) Money; income

b) Wealth; income

c) Income; money

d) Money; wealth

25. The difference between money and income is that

a) Money is a flow and income is a stock.

b) Money is a stock and income is a flow.

c) There is no difference—money and income are both stocks.

d) There is no difference—money and income are both flows.

QUESTION 2 [25 Marks]

1. What do we calla credit market instrument that provides the borrower with an amount

of funds that must be repaid at the maturity date along with an interest payment? (1)

2. Calculate the yearly coupon payment if a NS1000 face value coupon bond has a coupon

rate of 8.75 percent. (2)

3. Calculate the amount to be repaid for a 3-year simple loan of NS$10,000 at 10 percent.

(3) 4. \faNS$10,000 face-value discount bond maturing in one year is selling for NS7,000, then

what is its yield to maturity? (3)

5. Ifthe interest rate is 5%, what is the present value of a security that pays you N$1,050

>

next year and NS$1,102.50 two years from now? (4)

6. Briefly discuss and illustrate with a diagram how the bond market would respond to an

increase in the expected rate of inflation. (12)

QUESTION 3 [25 Marks]

1. Why is it important to understand the bond market? (3)

2. What crucial role do financial intermediaries perform in an economy? (3)

3. Distinguish between direct finance and indirect finance. (4)

4. Alocal economist makes a statement in the newspaper that interest rate rise is bad for

everyone. Do you agree with the statement? Explain. (4)

5. Your bank has the following balance sheet:

Assets (in Millions NS) Liabilities (in millions NS)

Reserves 50 Checkable 200

Deposits

securities 50

Loans 150 Bank Capital 50

If the required reserve ratio is 10%, what actions should the bank manager take if there

is an unexpected deposit outflow of NS50 million? (11)

QUESTION 4 [25 Marks]

1. Briefly discuss three goals a bank pursues in managing its assets. (6)

2. Why do equity holders care more about ROE than about ROA? (5)

3. State any three players in the money supply process. (3)

4. If the central bank sells NS$1 million of bonds and commercial banks reduce their

borrowings from the central bank by N$1 million, predict what will happen to the

money supply. (7)

5. List the four factors that determine money demand under the portfolio theory. (4)

TOTAL = 100 MARKS